Finite Re Probes

A number of Bermuda companies continue to offer non-traditional finite risk products. They include Platinum Underwriters Holdings Ltd., ACE Ltd., PartnerRe Ltd. and The Imagine Group.

Last month, Michael Price, president and chief underwriting officer at Platinum Underwriters Holdings–which derives about 20 percent of its revenues and underwriting income from finite-risk deals–addressed the controversy in a conference call with analysts. "A number of buyers, sellers and their brokers currently foresee there to be too much uncertainty as to the proper accounting and disclosure for finite transactions, so both supply and demand have contracted in the short run," he said.

Platinum Underwriters recently conducted internal reviews as it responded to subpoenas from the SEC and Mr. Spitzer's office, according to Mr. Price.

Finite reinsurance was also on the mind of ACE Ltd. Chief Executive Evan Greenberg, who said during an analyst call last month that "we are still writing finite. It continues to generate income and revenue, but it's very slow, as you can imagine."

According to a Standard & Poor's director, Laline Carvalho, a "substantial number of companies" from Bermuda have been either subpoenaed or asked to provide information about finite reinsurance.

"Clearly, Bermuda wrote a substantial amount of this type of business, but it's still in the early stages of investigation to know exactly what types of products were offered by each Bermuda writer and whether there are any issues," Ms. Carvalho told NU. She predicted there would likely be "consequences for Bermuda" in some way, just as there have been in the United States.

At any rate, even if no problems are found in Bermuda, the negative spotlight now being focused on finite reinsurance undermines the viability of selling such products for Bermuda companies, she said.

To be sure, financial reinsurance–which has been around since the 1980s–is perfectly ethical and legal in the vast majority of cases, according to Standard & Poor's. Nonetheless, "finite re" has almost become a "dirty word" in the current wave of investigations and the continuing bad publicity surrounding such products, said another S&P analyst, Steven Ader.

Ms. Carvalho commented that in the past, Bermuda has often been the center of new ideas and products for insurance, and that finite reinsurance was no exception–with Bermuda markets playing a significant role in creating such products.

There are a number of Bermuda companies that sell finite re products, but their revenues from these sales vary widely. (In the past, there were more Bermuda companies specializing in finite risk–including Overseas Partners, Center Re and Scandinavian Re–but these have all exited the market within the last few years.)

In 2005′s first quarter, Platinum Underwriters, for example, saw its finite risk segment contribute $93.1 million to $493.8 million in overall net premiums written, and $11.2 million to $63.5 million total underwriting income. Yet last month, Platinum was concerned enough by the probes into finite re–which first started in the United States regarding deals involving American International Group and General Re–that the company devoted a significant amount of time during its latest analyst conference call discussing the topic.

In the call, Platinum's Mr. Price noted that various oversight groups–including the Financial Accounting Standards Board, the International Accounting Standards Board and the National Association of Insurance Commissioners–are all considering the question of risk transfer in reinsurance accounting.

"I think it's going to be quite a while before we get any new guidance on this matter, and until the accounting regulatory and headline risks recede, I believe there will be fewer finite deals done," he said.

Platinum hopes to stem the revenue loss by trying to transfer its non-traditional finite programs over to more traditional deals for clients. So far, Mr. Price noted, Platinum is having "some success" in converting finite transactions, "but certainly not 100 percent."

One Bermuda-based company that could see a significant impact from the current environment is The Imagine Group, whose Imagine Re reinsurance unit specializes in writing finite risks. The company didn't respond to NU's request for an interview.

Both ACE Ltd. and Partner Re also continue to write finite re, but income from those products make up only a minor part of their overall profit, the companies told NU–and even those incomes are likely to get smaller under the heightened scrutiny.

For ACE, finite re is part of its financial services business, which makes up about 8 percent of ACE's overall revenues, while Partner Re sells finite products through its Alternative Risk Transfer unit–a small part of the company's overall operations. Both carriers have received regulatory subpoenas regarding their finite re sales and say they have been cooperating fully with regulators.

Neither company has discovered any problems related to their finite re deals in their reviews so far. However, complying with regulatory inquiries doesn't come cheap. Indeed, in the first quarter, ACE reported some $30 million related to investigations-related expenses, including reviews for finite reinsurance.

Caption For Beach Scene:

Regulatory probes into finite reinsurance deals threaten to wash away supply and demand for the controversial products in Bermuda.

Quotebox: (With Photo. Sent to Don.)

"Clearly, Bermuda wrote a substantial amount of this type of business, but it's still in the early stages of investigation to know exactly what types of products were offered by each Bermuda writer and whether there are any issues."

Laline Carvalho, Director

Standard & Poor's

Quotebox: (if needed==trying to get a photo)

"A number of buyers, sellers and their brokers foresee there to be too much uncertainty as to the proper accounting and disclosure for finite transactions, so both supply and demand have contracted in the short run."

Michael Price, Chief Underwriting Officer

Platinum Underwriters